Libor deadlines – the dominoes start to fall

Bankers may be looking back with fondness to more normal times, when the biggest problem they faced was how to prise trillions of financial contracts away from Libor. Now, when they’re fighting a full-blown financial meltdown from makeshift offices at their own kitchen tables, Libor transition might be starting to look like run-of-the-mill stuff.

Regulators want to detach the market from Libor before the end of 2021, when panel banks will be free to stop supporting the rate and it could vanish. An array of deadlines for re-hitching segments of the market to overnight risk-free rates (RFRs) were already a tall order. Since coronavirus (Covid-19) panic sent stocks, bonds and oil prices tumbling – and tested business continuity plans in all manner of new ways – the timetable is beginning to look impossible. 

The first domino has already fallen. On March 16, the US Federal Housing Finance Agency extended the deadline for federal home loan banks including Fannie Mae and Freddie Mac to cease entering into Libor-based instruments that mature after the end of 2021. Originally slated for March 31, the lenders have been given a further three months to comply. 

On March 18, the International Swaps and Derivatives Association extended the response deadline for its second consultation on pre-cessation triggers in swaps fallbacks. Initially planned for March 25, participants now have until April 1 to decide whether Libor swaps should switch to RFRs on the benchmark being deemed non-representative, or on its final demise. 

Further extensions are foreseen. “The view of most is that some form of delay will be required, it’s just a question of what that looks like,” says a London-based banker familiar with sterling RFR working group discussions. 

On March 25, the UK Financial Conduct Authority (FCA), Bank of England and members of the working group on sterling RFRs confirmed the end-2021 target date remains in place, though recent events are “likely to affect some of the interim transition milestones.”

One of the most pressing in a wave of tight deadlines comes at the end of September 2020, when the FCA has called for an end to Libor-linked lending in sterling markets. Just a handful of loans have to date been linked to the sterling overnight index average (Sonia) – Libor’s successor for UK markets. For corporates, making the leap to a compounded-in-arrears version of an overnight rate requires systems updates. With a crisis raging through the real economy, it’s unlikely to be at the top of a treasurer’s to-do list. 

“The Q3 date for shifting all sterling lending was an important part of the wider transition, but obviously that date is in question given current events,” says one London-based trader.

Concerns over readiness were already elevated before concerns over Covid-19 took hold. In a recent survey by the Futures Industry Association and Greenwich Associates, 63% of end-users identified Libor transition as a top priority for 2020, yet only 21% claimed to be “appropriately prepared”. Almost 10% had yet to commence any planning. 

Dislocated rates markets haven’t helped either. The secured overnight financing rate (SOFR) – US dollar Libor’s heir apparent – has decoupled from other lending benchmarks such as commercial paper rates and Libor itself, exacerbating worries over its appropriateness as a lending benchmark. 

Regulators may have to accept Libor transition will be slower than they hoped. But the final framework may yet be more robust as a result. Knowing how rates perform in times of stress will be crucial to the success of benchmarks intended for real economy use, and there’s been no bigger stress test for rates markets than that seen in March. 

 

Libor Risk – Quarterly report Q1 2020
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